Lawsuit Says Education Dept. Overcharged on Student Loans

The U.S. Department of Education has overcharged millions of Americans with student loans during the past decade despite repeated warnings that it was breaking the law, according to a lawsuit filed yesterday.

A computer glitch apparently caused more than 3 million student loan borrowers to be billed hundreds of millions of dollars more than they owed, said lawyers who brought the class-action suit. It's unclear how much individuals were overcharged.

"That's a large amount of money taken from students who trust that this program is run accurately and appropriately," said Brenda K. Pfeiffer, a 41-year-old Minnesota chiropractor who discovered the problem and is the lead plaintiff.

The Education Department's student loan programs have been buffeted by a series of controversies and have come under increased scrutiny by Congress. Lawmakers are investigating potential mismanagement and conflicts of interest. Legislation has been proposed to revamp the way the two major federal student loan programs are run.

"The Department of Education should look closely into the allegations made in the lawsuit, and Congress should continue to examine both student loan programs to ensure they're working well for our students," Sen. Edward M. Kennedy (D-Mass.), chairman of the Senate education committee, said in an e-mail statement.

Katherine McLane, a department spokeswoman, said agency officials would not comment on the issue because they have not been served with the suit.

The suit, filed in U.S. District Court in Washington, says a complex billing problem affected Americans with consolidated loans that totaled more than $72 billion. The suit says the department essentially imposed late fees on borrowers even though their payments were made on time.

Pfeiffer, a former high school math teacher, said the problem is so complex that it took her more than 1 1/2 years to figure out what was going on.

Pfeiffer graduated from chiropractic school in 1994 with more than $90,000 in debt. In 1997, she consolidated multiple loans under a plan that required her to make payments by the 21st of every month.

The Education Department penalizes consolidated loan borrowers who fail to make all of their annual payments by June 30 by adding penalties to the principal of their loans, on which they then have to pay extra interest.

Pfeiffer discovered that she was being fined unfairly, her lawsuit says. She made her June payments on time and sometimes early. But the department was penalizing her for not making a separate payment for the days between her June payment and June 30, the suit says, even though her next wasn't due until July 21. The penalties were then capitalized -- or added to the principal of her loan.

In 2002, for example, $368.76 was unfairly capitalized because of the accounting glitch, the suit says. Over the past five years, more than $1,000 was incorrectly charged to her. If the problem is not resolved, she will have to pay interest on that sum over the life of the loan.

Pfeiffer said she notified officials about the overbilling mistake at least 15 times over the phone and in writing. "Most of the time I was told that, yes, we realize that this isn't right, but that's the way the system is," she said.

Her case, brought by Sprenger & Lang, a District-based law firm that has filed scores of class-action lawsuits, calls on the Education Department to end the practice and return the money it incorrectly billed to student loan borrowers.

Lawmakers of both parties criticized the Bush administration this month for allowing a student loan company to keep $278 million in improper subsidies. Democrats are also investigating whether loan companies have offered universities questionable perks to persuade them to direct students their way.

Pfeiffer said she is particularly angered by her experience because the department ignored her warnings.

She said, "There's that level of frustration that after repeated attempts and not getting anywhere, you feel empty-handed and say, 'What do you do next?'"